by Coinstrooper Crypto Articles
Quick Take
  • The first wave of crypto ETFs allowed investors to onboard crypto assets into traditional brokerage accounts – and tax-advantaged retirement accounts.
  • Given the long-term return potential of cryptocurrencies, that’s a win-win.
  • Last week’s $19 billion leveraged wipeout in bitcoin surpassed the wipeout at the Covid bottom in March 2020.
  • Investors in traditional assets like the upside potential of crypto.

What Happened

The first wave of crypto ETFs allowed investors to onboard crypto assets into traditional brokerage accounts – and tax-advantaged retirement accounts. Given the long-term return potential of cryptocurrencies, that’s a win-win.

Investors in traditional assets like the upside potential of crypto. But the downside volatility is a bit much to stomach.

For more cautious investors, crypto income ETFs may be attractive investment opportunities. But as with anything, buyer beware.

On paper, crypto income ETFs offer investors most of the upside from cryptocurrencies, but with income along the way.

However, investors need to look at the total return. BITO shares are down nearly 20% year-to-date.

And on top of that, investors are paying a 0.95% management fee.

The Defiance Leveraged Long Income Ethereum ETF (ETHI) launched at the start of October.

Currently, crypto income ETFs are set up to make investors only during a hot bull market – not a crypto winter, or even a sideway market.

Market Context

Not content to simply buy and HODL, they’re employing different strategies to take advantage of the higher volatility in cryptocurrencies.

Being able to manage crypto futures allows for the ability to create income. By buying long-dated futures and then selling short-dated futures, income can be generated from price swings.

Some of the income returns look good, at least during a bull market. For instance, the ProShares Bitcoin ETF (BITO) boasts a dividend yield of over 50% annualized.

With the underlying asset of Bitcoin up over 20%, BITO has generated only a modest gain on top of that. Anyone who has to sell shares of BITO will experience capital loss despite having to pay taxes on dividends received.

Using futures, ETFs effectively buy an asset with a time premium that decays. During a bull market, the impact is muted. But in sideways markets or a crypto winter, the losses can be brutal.

Designed to return 150-200% of the daily performance in Ethereum and using credit spreads to generate income, shares dropped 30% within their first few weeks of trading.

Why It Matters

Crypto ETFs Might Not Hold Good Income Potential

October 10’s liquidation massacre is the immediate culprit. But the way this ETF is structured, it would likely bleed out over time.

Details

But cryptos are still volatile. Last week’s $19 billion leveraged wipeout in bitcoin surpassed the wipeout at the Covid bottom in March 2020. And the FTX collapse in late 2022.

They want products that take some of the extreme swings out of it, even if it means a lower upside.

Today, a new wave of ETFs are coming online. They boast higher fees, but more active management.

A peek under the hood of some of the income ETFs show that – whether in a crypto-specific ETF or a basket of crypto stocks – there aren’t great total returns.

The Pros and Cons of Crypto Income ETFs

But there’s a catch. Actually, quite a few. The most important is that these ETFs use crypto futures, rather than hold crypto itself.

Why The Disconnect?

Combine that with leverage, and the results can get pretty bad, pretty quickly.